As a former Executive Director of the World Bank I know that the columnists of the Financial Times have more voice than what I ever had, and therefore they might need some checks-and-balances.
Currently, having probably trampled some delicate ego, I am a persona non grata at FT.
Would the child shouting out “the Emperor is naked” have his observation published in FT? Would the child now need a PhD for that?

For more see "A Blog is Born" at the very bottom.

September 25, 2017

Sir, Michael Savage writes that though “Martin Wolf asserts that a fivefold increase in banks’ capital requirement is simple and almost without social costs… A study by William Cline of the Peterson Institute finds that each percentage point increase in capital to total assets reduces long-run gross domestic product by 0.15 per cent.” “A safer banking system demands tough trade-offs” September 25.

Indeed different general capital requirements may represent different social costs, but these would not even come close to the social costs of having different risk weighted capital requirement. That is because the latter distort the allocation of bank credit to the real economy.

Unfortunately the social costs of those distortions are rarely or even never discussed. At least you Sir seem not to be interested at all in that.

Sir, George Hatjoullis writes: “Only the central bank can provide unimpeachably safe liquid assets…[so] allow individuals and corporate entities to hold deposit accounts with the central bank… The banking system would be free to pursue its risky credit provision role and individual entities would have their safe liquid haven”, “Allow deposit accounts within central banks” September 25.

That is based on two false premises. The first one is that central banks really are riskless. Though they can always print money, there’s no guarantee they won’t print too much money, and therefore repay with money worth less.

The other is that you could provide some with “unimpeachably safe liquid assets… a safe liquid haven” at no costs. The opportunity cost of that, is not sharing into the benefits of risk taking.

When it comes down to risk management I always start by asking: “What risk is it that you can least afford not to take?” That is because the worst certainty comes hand in hand with the avoidance of all risks.

Sir, to allow some to have access to unimpeachably safe liquid assets, while others take the risks, just guarantees putting inequality on steroids. The society should not do that! An adequate bank system allows everyone to share, at least ever so slightly; in the risk-taking the society needs to move forward.

@PerKurowski

September 23, 2017

Sir, Tim Harford writes: “bold lies have become the dead cat of modern politics on both sides of the Atlantic. Dramatic lies do not always persuade, but they do tend to change the subject — and that is often enough. It is hard to overstate how corrosive this development is. Reasoned conversation becomes impossible”, “The fatal attraction of cynical falsehoods” September 23.

The Basel Committee for Banking Supervision, with Basel II in 2004, and for the purpose of setting the capital requirements for banks, assigned a risk weight of 20% to the AAA rated and one of 150% to the below BB- ones.

Since an AAA rated borrower is very much less likely to default than a below BB- rated, at first sight this could seem reasonable.

But precisely because of these perceived risks, banks lend much more and at much lower interest rates to the AAA rated, and very little or nothing, or anyhow at much higher interest rates to the below BB- ones.

And therefore, when it instead comes down to what poses more dangers to bank systems, and if applying the same weights, it would be the AAA rated that carried the 150%, and the below BB- the 20%.

So, as a result of allowing banks to leverage 62.5 times, as long as an AAA rating was present, (or even more in the case of sovereigns like Greece), excessive exposures to “the safe” were created and a super-crisis exploded.

But then the regulators, friends and admirers lay on the table the argument of it all having resulting from excessive risk-taking by banks.

That surely has all the characteristics of a dead cat but, when one tries to raise this issue the regulators, and undercover economists, they all shut up like clams.

Sir, since risk weighting the capital requirements dangerously distorts the allocation of bank credit to the real economy, we can’t allow for that to go on, and so we must insist in getting that dead cat off the table.

Unfortunately it would seem you also want that dead cat to remain on the table

“Global central banks have artificially distorted capital markets for several years, by creating vast amounts of new money to buy sovereign debt. The supposedly “risk-free” interest rate, on which much of the system depends, has been undermined (and she concludes)… it is important to consider the democratic dangers to capitalism which prolonged QE may pose. ” “Disguised fiscal measures play role in democratic recession” September 22.

She is absolutely correct, and I have over the years written for instance Martin Wolf numerous letters on it.

But there is also the regulatory distortions provoked by the risk weighted capital requirements for banks introduced in 1988 with Basel I, and which assigned a 0% risk weight to sovereigns.

That meant at that time, and well into current Basel III times, that banks needed to hold little or no capital when lending to sovereigns; meaning banks were authorized to leverage immensely when lending to sovereigns; meaning banks could earn fabulous risk adjusted returns on equity when lending to sovereigns; meaning banks would lend too much and at too low rates to sovereigns.

So, when to QEs we add this through-the-back-door regulatory subsidies to government borrowings from banks (and now with Solvency II extended to insurance companies) it is absolutely clear we have no idea what the real cost of public debt is; and so we are all flying blind… and government bureaucrats having much easier access to bank credit than SMEs or entrepreneurs.

Last November, during IMF’s Annual Research Conference, I got at long last one of the major experts, in this case Olivier Blanchard, to agree with me in that “lets make sure that we have removed all the distortions which we can, which affect r (rates), so we have the right r”.

Sir, as of this moment that was the last time I have heard about it.

Why is there no response? Perhaps the answer is found in Upton Sinclair’s “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”

I am not sure that means to allocate bank credit efficiently to the real economy, but if it does then I agree.

But that purpose was absolutely absent from regulators’ minds when, because of an insane risk aversion, they decided to allow banks leverage much more the capital required by regulations when lending to “the safe”, than when lending to “the risky”.

The result was henceforth that banks would be able to earn higher risk adjusted returns on equity while lending to the safe than when lending to the risky. That, which allowed bankers to realize some wet dreams and big bonuses, completely hindered banks from fulfilling their purpose.

We read: banks “remain highly undercapitalised, relative to the risks they bear.” That is a misleading statement. Banks remain highly undercapitalized relative to the risks of the assets considered by regulators to be safe, is a more correct way to describe the reality.

Wolf holds: “This system is designed to fail” Of course it is. To allow banks to hold less capital against those assets that have always provoked major bank crises, namely those ex ante perceived as safe, cannot but result in making the failures even more dangerous.

The truth is that current bank regulators are too inept for comfort.

Wolf also refers to all “these proposals try to separate the risk-taking from the public’s holdings of unimpeachably safe liquid assets”

To me such proposals are the product of obnoxious social/financial engineering mindsets.

Unless we limit it to perhaps the value of one year’s median salary, why on earth should the public have the right to unimpeachably safe liquid assets… and why on earth should it not have the right, and the duty, to participate in the risk taking a society needs to move forward?

And just the expectation of “unimpeachably safe liquid assets” introduces a huge systemic error.

To follow that recipe, in an economy depressed by lack of risk taking, would have the remaining risk takers end up with all the negative interests earned by the risk avoiders… talk about putting inequality on steroids and feeding lines to populists.

No way Martin Wolf, that is not the way my western world got to where it is… that is not the road I want my world to take for my grandchildren.

Am I opposed to higher bank equity? Of course no, though I do not feel that much more than ten percent is needed… as long as it is ten percent for all… sovereigns, AAA rated and housing finance included.

To require 20%, a leverage of five to one, while leaving in place any kind of risk weighting adjustments, could just worsen current distortions.

PS. Wolf refers to Mervin Kings book “The end of alchemy” but that book had nothing to say about “the alchemy of risk-weighting” to which he now refers to, and about which I have written hundreds of letters to him over the years.

September 20, 2017

Sir, Martin Wolf writes “the financial crises that destroyed globalisation in the 1930s and damaged it after 2008 led to poverty, insecurity and anger. Such feelings are not conducive to the trust necessary for a healthy democracy. At the very least, democracy requires confidence that winners will not use their temporary power to destroy the losers. If trust disappears, politics becomes poisonous” “Capitalism and democracy are the odd couple” September 20.

No! Free flowing not encumbered by crony statism capitalism is about as democratic it can be.

But one of the pillars of current bank regulations is that when banks lend to or invest in something perceived as safe they are allowed to leverage more their equity than if that is done with something perceived as more risky. That means banks can obtain much higher risk adjusted returns on equity financing the safer present than financing the riskier future.

The 2008 crisis resulted from too much exposure against too little capital to “safe” AAA rated securities, or to sovereigns decreed safe, like Greece.

The minimal response of the real economy to all stimuli, like QEs, is in much the result of “risky” SMEs and entrepreneurs not having a competitive access to bank credit.

To top it up a zero risk-weight of governments with one of 100% of citizens has nothing to do with democracy and all to do with statism brought in through backdoors.

“Democracy says all citizens have a voice; capitalism gives the rich by far the loudest.” Indeed but self appointed besserwisser regulators gave “the safe” more voice than “the risky.”

Wolf’s article ends with “After the crisis, hostility to free-flowing global finance is strong on both right and left”.

Mr. Wolf, that hostility was preceded, and caused, by that insane regulatory hostility against free-flowing bank credit, about which you have decided to keep mum on.

@PerKurowski

September 18, 2017

Sir, Rana Foroohar, with respect to those services we supposedly receive free from Goggle, Facebook and similar for free, correctly writes “free is not free when you consider that we are not paying for these services in dollars, but in data, including everything from our credit card numbers to shopping records, to political choices and medical histories. How valuable is that personal data?” "Big tech makes vast gains at our expense", September 18

Indeed, more than 10 years ago I wrote you a letter in which I said: “Clearly a search engine should mostly be valued in terms of the services it offers to the searchers but in this case it is actually the searchers that become the searched and this leads to some very strange signalling effects”.

And since then I have been all over the web promoting among others the possibility that we should be able to get an intellectual property right over our own preferences, in order to have sometRhing to negotiate with… and then on how we could enter into agreements with ad-blockers that could help us exploit those IPRs.

But lately what has also come to concern me, is how our very limited attention span is being overexploited, leaving us too little time for reflection on our own realities.

Would it not be great if Google or Facebook, or any such similar social media service we get hooked on, and which has over a million members, could only send each member ten adds per day, and that these would receive 50% of any ad revenues collected as a result of having clicked on the ad?

Under no circumstances should we humans allow the marginal cost of bothering us to be zero.

I believe that could benefit all parties involved. Even Google, Facebook and alike would be less harassed by the besserwisser. Don’t you think so Sir?

But now it would seem that Wolf has given up all hope, as when he seemingly in panic writes: “As a species, our power is now too great to afford today’s essentially uncontrollable competition among myopic states. I do not expect us to achieve a world government. But that is also why I expect humanity to do unimaginable damage to itself and the planet over the coming centuries”, “What’s the big — and the bad — idea?” September 16.

And to avoid those “unimaginable damages to” humans, Wolf would now “like to see a world government. It would be a confederation, with a governing council, no president. Maybe three consuls.”

What on earth as gone into Wolf’s mind, what would that guarantee us?

In April 2003, when as an Executive Director of the World Bank I commented on the World Bank's Strategic Framework 04-06, I opined: "A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind."

So Sir, for me to substitute with some three besserwisser the wisdom of all us individual humans, is sort of the last thought that enters my mind.

On the contrary, what we must do is to increase the changes for the most insignificant of citizens, like me, to question the wisdom of any self or network appointed consuls of the world.

For instance Wolf could do much good by helping me ask bank regulators why on earth they decided to assign a risk weight of only 20% to what is AAA rated and which therefore could provoke the creation of dangerously high bank exposures; while giving the below BB- rated, those so innocuous because bankers won’t touch them with a ten feet pole, a whopping risk weight of 150%.

Sir, I do feel sorry for Martin Wolf, I suspect Brexit and Trump has been too much for him, it has short-circuited his great mind.

Sir, Robin Wigglesworth writes: “An archaic, often-mentioned but never-invoked legal doctrine called “odious debt” could be tested for the first time in history in Venezuela should the regime be ousted from power.” September 12.

I feel that for us citizens, everywhere, even more important than the concept of odious debt, is to define a legal doctrine on “odious credit”, this for the simple reason that the first would not exist without the latter.

In other words, are we to hold an uneducated trying to survive day-by-day thug like Nicolas Maduro, to higher moral standards than those highly educated in Goldman Sachs’ who, if their education is worth anything, should be able to survive without financing badly masqueraded violations of human rights? I think no!

Sir, we do need a Sovereign Debt Restructuring Mechanism, urgently, but if such an SDRM is really to mean something good for the world, then the concept of odious credit has to be an integral part to it.

September 16, 2017

Sir, I refer to “Debt Collectors” September 16, in which Eric Platt, Alexandra Scaggs and Nicole Bullock search to explain what could happen to the “portfolio of cash, securities and investments worth roughly $840bn, held outside the US by just 30 US companies, because of tax reform designed to … encourage American companies to bring back jobs and profits trapped overseas”.

The article, though it refers to difficulties such as the “repatriation process itself could involve selling bonds” and the impact of that on interest rates, fails to illustrate the whole truth.

The reality is that all that “cash”, as well as all that “cash” held by other wealthy (for instance in Panama) except for the less than 1% that could be in real cash, is in other assets like securities investments, perhaps even in art collections.

So, in order to convert all that “cash” into real cash, those other assets have to be sold to others who are then required to give up their real cash for these. And, in that process, clearly a lot of the value of the “cash” would just change hands or disappear.

Why are these difficulties of converting “cash” into cash not more discussed? Because doing so would be sort of inconvenient for those redistribution profiteers who try to sell their politically beneficial envy, for instance that present in the “one percenters being against all us 99 percenters” theme.

What is a £20 million flat in London or a US$200 million Picasso hanging on a wall but the voluntary freezing of millions in alternative purchase power that could be out there in the economy competing for consumer goods… and generating inflation? Is a lowering of the value of hard-assets the inflation driver central banks want?

PS. Of course the above does not take away one iota of the need to relentlessly pursue those who have accumulated “cash” assets illegally, and might hold these in places like in Panama.

September 14, 2017

Sir, Matthew C Klein writes: “Lots of people were supposed to prevent the financial crisis…most policymakers, risk managers, and academics failed in their responsibility to protect the rest of us. After the fact, the common defence was that the crisis so complex and unusual that it would have been impossible to predict “Anyone awake in the 1980s should have known about the dangers in the 2000s” Alphaville September 13.

Complex? Not at all! And you do not, as Klein usefully suggests, need for that to go back to what happened in the 1980s and 1990s.

Sir, just dare answer! If regulators allow banks to leverage their equity 60 times or more just because an AAA rating or a friendly sovereign is present… does that not doom banks to disaster? Of course it does!

Here are some examples of what I wrote:

October 1998, Op-Ed in Venezuela: “History is full of examples of where the State, by meddling to avoid damages, caused infinite larger damages”

November 1999, Op-Ed Venezuela: “The possible Big Bang that scares me the most, is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause its collapse”

September 2002, Op-Ed Venezuela: “What a nightmare it must be to be a sovereign risk evaluator! If they underestimate the risk of a given country, it will most assuredly be inundated with fresh loans and leveraged to the hilt.”

January 2003, letter published by Financial Times: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds”

March 2003, in a formal discussion at the Executive Board of the World Bank: “The sole chance the world has of avoiding the risk that entities such as the Basel Committee, accounting standard boards and credit rating agencies introduce serious and fatal systemic risks, is by having an entity like the World Bank stand up to them, instead of sort of fatalistically accepting their dictates."

April 2003, commenting on the World Bank's Strategic Framework 04-06 "A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind."

May 2003, in comments made at a workshop for regulators at the World Bank: “A regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.”

May 2003, Op-Ed Venezuela: “In a world that preaches the worth of the invisible hands of the market, with its millions of mini-regulators, we find it so strange that the Basel Committee delegates, without protest heard, so much responsibility in the hand of so very few and human-fallible credit rating agencies”

October 2004, in a written statement delivered as an ED at the Board of the World Bank: “We believe that much of the world’s financial markets are currently being dangerously overstretched, through an exaggerated reliance on intrinsically weak financial models, based on very short series of statistical evidence and very doubtful volatility assumptions”

November 2004, in a letter published by the Financial Times: “How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector (sovereigns)?”

But yet you Sir have silenced me, only because you think I am obsessed with the risk weighted capital requirements for banks. I tell you Sir, indeed I am, and you should be too!

Sir, John Gapper when discussing new open space offices that are intended to intensify creative communications writes that “companies should start by recognising what their employees fear losing” and among this, is obviously “privacy”. “Tech utopias drive workers to distraction” September 14, 2017

But the need for privacy is not only based on a wish of being alone but quite often much more on the wish to avoid some. In this respect it must be expected that social skills will be much more important when robots or artificial intelligence evaluates candidates in the future, because you cannot risk having absolute bores or pain-in-the-ass employees roaming around freely.

Evaluating human social skills? Now that’s a new challenge for artificial intelligence. I wonder what Watson has to say about it? Perhaps, a test-period in which all co-workers could use a point system to evaluate candidates? Would such discriminatory procedures be politically acceptable?

Sir, do your current headhunters discriminate candidates based on their social skills?

PS. How will robot recruiters treat their human ex colleagues they left without jobs?

@PerKurowski

September 13, 2017

Sir, Robin Harding writes: “Mr Buffett is brilliant at buying into monopoly profits, but he does not start companies or gamble on new ideas. America is full of entrepreneurs who do. Celebrate that kind of business. It is the kind America needs”, “How Buffett broke American capitalism” September 13.

And Harding also argues “however much you admire Buffett, his influence has a dark side because the beating heart of Buffettism, is to avoid competition and minimise capital investment in the real economy”

But what do bank regulators do? They tell banks that if they lend to or invest in what is perceived as safe, they need little capital, Basel II even allowed banks to leverage 62.5 times with what corporate asset carried an AAA rating.

And they tell banks that if they lend to or invest in what is perceived as risky, like to “risky” entrepreneurs who “start companies or gamble on new ideas” then they need more capital which means lesser possibilities of high risk adjusted returns on equity, which means banks will not lend to these.

If that is not “minimizing capital investment in the real economy”, what is?

Frankly when compared to the destructive influence current bank regulators have on the real economy, whatever bad influence Warren Buffett might have is inconsequential.

And at least Warren Buffett makes profits, while current bank regulators just make everything worse. That since they completely ignore those ex ante perceived safe pose much more ex post dangers to banks than those perceived risky.

Sir, Izabella Kaminska is not going to be much loved today as she bravely points out to many the very uncomfortable possibility that they might have fallen head over heels “for fanciful narratives or investor cults”. Well done! That is going to generate a lot of soul-searching. “Cultish long-termism can hobble investors” September 13.

I would though like to remind Kaminska that much of “investors’ forgiving attitudes” could be explained by current extraordinary low interest rates. Just like these introduce much laziness in the execution of projects these can also provoke fewer revisions of investment strategies. Also, do not the sheer existence of negative interest rates help fuel the “grandeur of the futuristic visions being touted”?

PS. I would not refer to Andrew Haldane as a great champion for long-termism. As a regulator he has supported the extraordinary short-termism imbedded in the risk weighted capital requirements for banks. These keep banks from financing the “riskier” future our grandchildren need to be financed, having them basically just refinancing the “safer” present.

@PerKurowski

September 12, 2017

Sir, you write: “It is clear that Google, Facebook, Twitter and a few others have become an important part of the social fabric. The dissemination of fake political news around elections in the US and Europe has illustrated as much”, “New realities confront a maturing Internet” September 12.

I don’t get it. If there was any “fake political news around elections in the US and Europe” that was that Hillary and Remain were shoe-ins. And although the dissemination is important the fact is that others produced these news… mostly the political correctness clans.

But let me get to the real issue here. We humans do not have more than 7 days a week with 24 hours each with 60 minutes each and 60 seconds each. That’s all! And social media is claiming more and more of that limited attention span and there is little we can do about it, if we do not want to disconnect entirely.

Perhaps if anyone outside our circle of friends would want to send us a message, like a fake news or an irresistible click-ad, had to pay us something, then we could perhaps align the incentives better. Some could charge one cent per message, others one dollar and perhaps a Nobel Prize winner or an important politician 100 dollars for 30 seconds.

If it were so, many more would think twice about having you lose your time with their silly useless messages… and we would all live happier.

Sir, Jason Bordoff writes about Saudi Arabia’s “National Transformation Program, a bundle of targets and initiatives designed to deliver the “Vision 2030” plan to diversify the country’s economy and reduce its reliance on oil revenue… head-spinning 543 initiatives and 346 targets… laudable focus on concrete targets, measurable outcomes, transparency and accountability, along with a strong focus on boosting the education and skill levels of Saudis.” “Saudi Arabia’s reform slowdown reveals its painful dilemma” September 12.

That sounds so much like Venezuela’s ambitious plan of how to deploy the booming oil revenues, plus all that indebtedness that oil riches stimulated, during Carlos Andres Perez first presidency, 1974-79, a time that even became known as that of Saudi-Venezuela.

That plan provided clearly insufficient results, something that later helped clear the road to power for populist Chavez. Chavez and Maduro, in about 15 years, then managed to turn an even greater oil boom into the current pure minuses.

What amazes me is that Bordoff seems to imply that there is a possibility that the NTP could work. It does not! Centralized oil revenues, topped up with “$100bn for a public investment fund”, all managed by “a complex government bureaucracy” is a recipe for disaster. And if by any chance they got something right, that could be so easily wiped out by new generation of besserwisser government technocrats.

Before my two years as an Executive Director of the World Bank, 2002 2004, my only experience with the government sector was as the first Diversification Manager at the Venezuelan Investment Fund set up in 1974. That gig lasted me only two weeks because, when pressured by politicians for a fast approval (one week) of a US$ 2 billion pet project (Plan IV Sidor), I knew the system would not work and, as I told the Fund’s board members when I resigned, I was too young to risk being hanged if that or other projects failed.

@PerKurowski

September 11, 2017

If you were a banker, of that type that until 1988 (Basel I) existed for about 600 years, you would, in order to obtain the highest risk adjusted return on equity, and while keeping a close eye on your whole portfolio, lend money to whoever offered you the highest risk adjusted interest rate… of course as long as all your other costs were covered.

If for instance you had to hold 10% capital, perhaps so that your depositors or regulators felt safe, then your expected return of equity would be the average of those net risk adjusted interest rates times 10 (100%/10%)… this before taxes of course.

If an SME or an entrepreneur offered the bank a perceived risk adjusted net margin of 1.25% while an AAA rated only offered 0.75%, the banker would in that case naturally prefer giving the riskier borrower the loan... though probably it would be a much smaller loan.

Sir, do you agree with that? No? Why?

Because when bank regulators introduced risk adjusted equity requirements, they completely changed banking. Since then the risk adjusted net margins borrowers offered, have to be multiplied, by the times these margins can be leveraged on equity.

For instance Basel II, 2004, with a basic 8% bank capital requirement, assigned a risk weight of 20% to any private sector exposure rated AAA, which meant banks needed to hold 1.6% (8%*20%) against these exposures, which meant they could leverage equity 62.5 times (100%/1.6%).

That same Basel II assigned to for instance an unrated SME or entrepreneur, a risk weight of 100%, meaning a capital requirement of 8%, meaning banks could leverage only 12.5 times their equity with this type of loans.

So now what happened? The AAA’s 0.75% net risk adjusted margin offer would become almost a 47% expected risk adjusted return on equity, while the riskier’s 1.25% would only represent about a 16% expected risk adjusted return on equity. Therefore the bank would now by much prefer the AAA rated… Bye-bye SMEs and entrepreneurs.

To earn the highest perceived risk adjusted ROE on the safest, must clearly be a wet dream come true for most bankers; well topped up by the fact that requiring so little capital from their shareholders when lending to the “safe”, left much more profits over for their bonuses.

Did not regulators know their risk weighted capital requirements would distort in this way the allocation of bank credit to the real economy? Seemingly not and that is why I suggest they should go and get some basic business education… after the professors who did not see this have also gone back to the most basic basics.

That because, if regulators did know about the distortion they would cause, then they have no idea of history… or worse, they are financial terrorists. That because no major bank crisis have never ever resulted from excessive exposures to what is ex ante perceived as risky; these have always, no exceptions, resulted from excessive exposures to what was ex ante perceived, and never ever from what was ex ante perceived as risky.

Sir, come to think of it you and most of your collaborators, perhaps all, should also go back to a business education 101.

As one who had never worked in the public sector, but got still dropped on the World Bank as an Executive Director, I found there numerous occasions to scream out for more diversity.

For instance, when the search for a new Chief Economist for the World Bank was announced, we were told that although it was obviously quite a delicate task, it should not take too long, as the search had to be carried out within “quite a small and exclusive community of development economists.”

Naturally, most of my arguments, like when trying to explain to my fellow board directors that substituting, with a plumber or a nurse, two of us directors selected by lottery, would make us a wiser board, fell on deaf ears not a iota interested in rocking the comfort of sameness.

How could we get more diversity? Perhaps by requiring some boards to document why they think they are sufficiently diversified. Of course that does not mean accepting as an explanation, the existence of a racially and gender diversified group in which all members have pursued the same academic degrees and the same type of jobs.

Of course where we most need diversity is among our bank regulators. The fact they can live with 20% risk weights for that which could generate dangerous excessive exposures, like to the AAA rated, and one of 150% for what is turned so innocuous by being rated below BB-, only evidences the existence of a mutual admiration club with members engaged in very incestuous group-thinking.

Sir, isn’t it ironic that those regulators supposed to make our banks safe, are especially endangering our bank system?

Sir, Henry Foy, Robin Wigglesworth and Gideon Long report on how “Venezuela [Maduro] has invited international bondholders to negotiations over its foreign debt as Caracas seeks to mitigate the impact of US sanctions and survive a deepening economic crisis.” “Venezuela sets up talks on foreign debt” September 9.

Legitimate debt/credit, sort of legitimate debt/credit, more dubious debt/credit and clearly odious debt/credit composes Venezuela’s public debt. It behooves Venezuela, as well as all citizens in the world who could in the future face similar challenges, to make sure that in any negotiations here referred to, there are true representatives of the Venezuelan citizens, in order to make sure that differentiation occurs, and that there is no legitimation of debts that do not entirely merit it.

In this respect I hope the Venezuelan National Assembly, by voting, not by some finger-pointing appointments, selects who are going to represent it in any of these negotiations; and then formally notifies all interested parties of their names, that including all officials of the Paris Club.

Clearly those Venezuelan citizens representatives must present no conflicts of interest with either creditors or with those in government that have been involved with the “contracting” of such debt.

PS. What’s “sort of legitimate debt/credit”? That which is legitimate in legal but not in moral terms.

But is so much worse than that. When it comes to bank credit there is also the pro-perceived safety bias that hinders the SMEs’ access to bank credit. That “over-leverage in the banking system” Rolet writes of, does absolutely not include loans to “risky” SMEs and entrepreneurs, those” best positioned to drive economic growth and create new jobs”

Basel II allowed banks to multiply their capital 62.5 times with the net risk adjusted margins obtained from the AAA rated but only 12.5 times if that same margin was obtained from unrated SMEs. Anyone who cannot understand how that must distort, has never left his desk and walked down Main Street.

And on the same page appears Gillian Tett’s “Treasury bill jitters lay bare investor angst”. Even when it relates to “the curse of living in an Alice-in-Wonderland world, a place where it is increasingly hard to price risk and uncertainty because the normal rules are being torn up”, it does not refer to that abnormal rule of bank regulators considering, ever since Basel I of 1988, the (friendly and good) sovereigns to be worthy of a zero risk weight. That weight usually defended with the argument that sovereigns can always repay since they print their own money… blithely ignoring the Weimar Republics, Zimbabwes, Venezuelas and many other experiences.

And does not a below zero interest rate on some public debt by sheer definition state that it cannot be zero risk weighted? Or will the fact that some are willing to lose in order to hold it suggest a minus 20% risk weight? What a loony world!

To allow a bank to leverage more with a sovereign than with an SME signifies, de facto, from the perspective of how the allocation of credit is distorted, believing in that government bureaucrats are more capable to use credit they are not personally liable for, than those entrepreneurs who put themselves on the line. Sir, you’ve got to be a full-fledged fool or a runaway statist to believe nonsense like that.

In November 2004 FT published a letter in which I wrote: “We also wonder how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector… access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

Sir, I am all for “dreamers” being allowed to remain in America, but I must remind you that, all around the world, there are many dreaming of an opportunity to access a bank credit in order to realize their dreams… and those dreams have been made unrealizable, thanks to inept regulators… and you Sir are shamefully keeping mum on this.

@PerKurowski

September 04, 2017

Janan Ganesh writes: “There is such a thing as bad stability. Gradual decline is its most insidious form… It is the toll paid in decades, not moments, that promises the worst”, “Britain faces a stable path of relative decline”, September 5.

Sir, what can I say? Except for… that does not apply exclusively to Britain.

I have sent you literally thousands of letters reminding you of that risk-taking is the oxygen of any development… and that we in the Western world progressed, among other, because we knew that in our churches we had to implore “God make us daring!”

As well as literally thousand of letters explaining how current risk weighted capital requirements stops banks from financing the riskier future, keeping these to only refinancing the safer present.

“Dear baby-boomers, there is a world out there that needs a whole lot of risk-taking in order to stand a chance of a better future; a world which does not want to lay down and die in tranquility, just yet.”

Sir, when will you, without fear and without favor, dare to recognize this?

He does so blithely ignoring that “The shrinking of the union movement to the point where today only 6.4 per cent of private sector workers — a decline of nearly two-thirds since the late 1970s” sort of evidences an irrelevance of the unions. Does he want to make them relevant by force?

Also, when Summers writes “Consumers also appear more likely now to have to purchase from monopolies rather than from companies engaged in fierce price competition meaning that pay checks do not go as far” that squares little with the current low inflation.

Years ago, I wrote an Op-Ed titled “We need decent and worthy un-employments”. In it I argued that politicians are giving too much relative importance, and spending too many tax dollars, on creating jobs, and that it is high time to start thinking about what to do with those who will never ever have access to what we now consider is a job.

So in that respect I am certainly not too much keen on having unions fighting for those blessed by jobs, if that hurts in any way shape or form those who would want to have jobs but cannot get jobs.

Universal basic income seems to represent one alternative of how to face the challenge of structural unemployment. Finance professors would be much more useful thinking about smart ways how to fund an UBI than getting teary eyed nostalgic about union power.

Summers also writes: “The central issue in American politics is the economic security of the middle class and their sense of opportunity for their children”

Sir, anyone who keeps mum about how current risk weighted capital requirements give banks incentives to not finance the riskier future, but only to refinance the safer past has, as I see it, no right to speak about our children’s opportunities.

In 2008, trying to build a bridge that could resolve some issues, I ended an Op-Ed with a proposal of introducing a special tax on all profits generated under the cover of any IPR, for instance a patent.

As I have since repeated many times, it is not logical the same tax rate applies to profits obtained when competing naked in the market, than when the profits are obtained under the cover of a protection.

Such tax should, as a minimum minimorum, at least cover all costs for society of awarding and enforcing IPR protections.

Nowadays I would also argue that tax should also be a source of funding for a Universal Basic Income. That because, most or even all of these protections, truth be told, are sort of unfairly awarded to whoever runs the last leg of a relay that has been run, with ingenuity, creativity and strenuous efforts, by generations of humans.

Sir, John Dizard writes: “NFIP, the federal flood insurance programme, has been risked and priced so unrealistically that it … encouraged construction in flood-prone locations…[and] already has incurred a cumulative debt to the Treasury of more than $26bn, despite its failure to cover many homes and businesses.” And now it will be facing Harvey’s claims. “Flood Harvey inundates the insurance market” September 4.

If those approving NFIP writing insurances were Lloyd’s of London “names”, they would be liable until their very last cent. But no US congressman that approved NFIP in 1968 faced even remotely the same consequences. In fact it would seem they, without any consultation, designated their children and grandchildren as responsible “names”. Will these names be able to pay?

Also, how many homes have been built and destroyed by the fact these had access to NFIP?

Should this be allowed to happen without any sort of consequence? As a minimum minimorum I believe there should be a site for the greatest failed legislations that spells out the names of those responsible for it. The threat of ending up there might help stop a lot of irresponsible acts of legislation.

We do society a favour when our fallen in wars are honored in cemeteries like Arlington. We might do society an even larger favour by duly shaming those who help push our nations earlier into cemeteries; like those responsible for the risk weighted capital requirements for banks… that which has introduced a regulatory risk aversion that will condemn our economies to weaken and our banks to afixtiate in overpopulated safe havens.

One sad part of the story is that it will most often be retold by ex-post/Monday quarterbacking besserwissers, in terms of Mr Grainger taking excessive risks, something that no matter his wife’s concerns, he was not doing in any for him comprehensible way. And what’s wrong with one man putting all his eggs in the same basket in a crazy world in which regulators give banks huge incentives to put all their eggs in the same “very safe” basket?

That of allowing banks to leverage their equity (capital) 60 times or more with the net margins obtained from what was perceived, decreed or concocted as safe, like AAA rated and sovereigns, that was what in a huge way contributed to bring Mr Grainger’s “safe” Northern Rock down.

Did regulators lose their pensions because of that? No, they even got promoted. Many of them are even hailed as heroes when with QEs and ultra low interests they are kicking the crisis can over to next generations. It is truly an unfair world. It leaves indeed a very bad taste in my mouth.

PS. That FT, in its “10 years on”, is unable to pinpoint the main causes for the crisis, does only worsen that bad taste in my mouth.

@PerKurowski

September 02, 2017

Sir, Ben McLannahan, with respect to securitization of subprime mortgages quotes Julian Hebron, head of sales at RPM Mortgage with: “Making credit available to borrowers who are subprime is national policy and it is an important part of economic growth” “Financial crisis: 10 years on: The return of subprime” September 2.

Q. Do the subprime borrowers get any interest reduction from having their mortgages securitized, such reduction that could make these mortgage a safer investments for those investor who acquires these at lower rates? A. No!

Convincing risky Joe to take a $300.000 mortgage at 11 percent for 30 years, packaging it in a security, and then with a little help from the credit rating agencies convincing risk-adverse Fred that this mortgage is so safe that a six percent return is adequate, allows that mortgage to be sold for $510.000.

The $210.000 profit is now shared in it entirety by those originating the subprime mortgage, those packaging it, and those obtaining the excellent credit rating for the resulting security.

If that is “an important part of economic growth” that merits being part of a national policy, I don’t get it. Do you Sir?

If for instance 70% of those profits were paid back to those borrowers who lived up to their obligations, that would indeed imply a different and much more positive incentive structure.

Is that not something like for which cooperatives are often intended but not always achieve?

Sir, Patrick Jenkins quotes Lord King — now a professor at the LSE and New York University with: “it was inevitable that a crisis was going to occur… The banking system as a whole was very highly leveraged. It had on its balance sheet a large volume of assets that were very difficult to value and no one could work out what the exposure of one individual bank was” “Financial crisis: 10 years on Where are we now?” September 2.

“How had the world ended up in such a mess — and has enough been done to stop something similar happening again?”, asks Jenkins.

First: The crisis resulted from: Basel II of 2004 allowing banks to leverage capital (equity) more than 60 times if only there was an AAA-to AA rating presents or if the exposure was to a friendly sovereign, like Greece.

Jenkins writes “When the 2007 crisis broke, fingers of blame were pointed in all directions…. at policymakers for presiding over an environment of low interest rates and lax regulation” Lax regulation? No! Extremely distorting regulations. Had banks not been regulated by means of risk weighted capital requirements for sure some other crisis could have happened… but not that one that is here referred to.

Second: Since the risk weighing of some capital requirements is still used that guarantees that sooner or later, some safe-haven, like that of sovereign debt, will become dangerously overpopulated. Add to that the fact that risky bays, like SMEs and entrepreneurs, will not, as a result have sufficient access to credit, which will debilitate the real economy… and you can only come to the conclusion that, yes a crisis of the same nature is bound to happen again.

How can we stop it! To begin by removing all those who had something to do with current bank regulations because, as Einstein said: “No problem can be solved from the same level of consciousness that created it”.

To not debilitate the banks with fines and go after those responsible for any misbehavior would also help.

What would I do? Impose a straight 10% capital requirement against all assets; and if that puts a too big squeeze on bank capital, I would go a Chilean route of having central banks take on loans in order to capitalize the banks; and thereafter prohibiting banks from paying dividends before those shares that would have a preferential dividend have all been repurchased from the central banks. But that’s just me.

Sir, Patrick Jenkins in the Spectrum special “Financial crisis: 10 years on: Where are we now?” September 1 writes: “So great was investors’ appetite for these high-yielding MBSs and CDOs that mortgage companies lowered their underwriting standards to feed the securitisation sausage machine.”

Yes and no! First these MBSs had the additional quality of being rated by the credit rating agencies as very safe, AAA in many cases; and so in fact offered extremely high risk-adjusted yields, which made their great attractiveness perfectly logical. Naturally many investors would fall for these.

But then we have the problem with the securitization process itself. If you package something safe and sell it of as something safer, the profits are much smaller than if you manage to package something very risky and are able to sell it off as safe. So “mortgage companies lowered their underwriting standards”, not only because of the demand, but also because that allowed the original mortgages to carry higher interest rates, and so the profits of the packaging team would be larger larger. Here is how I have described that on my blog for more than a decade.

“If you convinced risky and broke Joe to take a $300.000 mortgage at 11 percent for 30 years and then, with more than a little help from the credit rating agencies, you could convince risk-adverse Fred that this mortgage, repackaged in a securitized version, and rated AAA, was so safe that a six percent return was quite adequate, then you could sell Fred the mortgage for $510.000. This would allow you and your partners in the set-up, to pocket a tidy profit of $210.000”

@PerKurowski

August 29, 2017

Sir, Mohamed El-Erian writes about Jackson Hole meetings 2017: “The symposium left open questions for markets that, given very profitable adaptive expectations, are conditioned to rely on central banks to boost asset prices, repress financial volatility and influence asset class correlations in a way that rewards investors and traders more.” “Yellen and Draghi had good reason for Jackson Hole reticence” August 29.

So instead of relying on the real economy, Mohamed El-Erian, and I presume all his colleagues operating in the financial markets, rely more on what central banks do.

That is so sad, especially since the risk weighted capital requirements for banks, hinders all central bank stimuli to flow where it should. We now have buyback of shares, dividends financed with low interest rate loans, house prices going up, but SMEs and entrepreneurs not getting their credit needs satisfied because the regulators feel these are "Oh so risky!"

El-Erian reports: “Janet Yellen, chair of the US Federal Reserve, and Mario Draghi, president of the European Central Bank — [told] politicians about the importance of financial regulation”

That only happens because politicians have not dared to ask regulators questions like:

Who authorized you to distort the allocation of bank credit in favor of those perceived, decreed and concocted, as “safe”, like sovereigns and AAArisktocracy, and away from the “risky”, like SMEs and entrepreneurs?

Where did you find evidence that those perceived as risky ever caused major bank crisis? As history tells us, these were always, no exceptions, caused by unexpected events, like those ex ante perceived as very safe turning up, ex post, as very risky.

PS. Do bankers love these crony relations? You bet! Being able to earn the highest expected risk adjusted returns on equity on what is perceived as very safe, must be a wet dream come true for most of them. And besides, by requiring so little capital, and therefore having to serve much less any shareholders’ aspirations, there is much more room for their outlandish bonuses

@PerKurowski

August 26, 2017

Sir, as one who has quite often tried on entrepreneurship adventures and not too often been successful at it, I cannot but say hear, hear to Janan Ganesh’s “Why must entrepreneurs get such a bad rap?” August 26.

The truth is that, except perhaps from some special inventions, nothing produces so much economic benefits we can all enjoy than what the successful entrepreneurs do.

And that is why I am so obsessed against those risk weighted capital requirements sissy regulators have imposed and that force banks to hold more capital against loans to SMEs and entrepreneurs, than they have to hold against the safe AAA rated, as the former had it not tough enough to access bank credit.

Ganesh writes: “The entertainment industry of the world’s most avowedly entrepreneurial nation tends to depict business only to pathologise it.” That’s absolutely right, and that’s why the title of my letter.

Come on Hallmark, you who have been so good at those chick-flicks that keep my girls fascinated hour after hour; please step up to the plate. Not only we guys are in need of some of the real-tough-it-out flicks.

Sir, Sam Fleming reporting from Jackson Hole writes “Janet Yellen, the Federal Reserve chair said regulatory reforms pushed through after the great financial crisis had made the system “substantially safer” and were not weighing on growth or lending. … If the lessons of the last crisis were remembered “we have reason to hope that the financial system and economy will experience fewer crises and recover from any future crisis more quickly”, “Yellen warns opponents of tighter financial rules to remember lessons of crisis” August 26.

As I see it Yellen has not yet learned at all that past and future financial crisis have not, nor will ever, result from excessive exposures to what was or is perceived as risky, these will always result from unexpected events, like when that was perceived, decreed or concocted as very safe, turned out ex post to be very risky.

Since regulators do not to want listen to anything else but their own mutual admiration net-works’ risk biases, I wish they would contract IBM’s neutral Watson to ask it the following:

Watson, while considering the purpose of banks as well as the real dangers to our financial systems, what algorithms would you suggest feeding robobankers with?

THEN Yellen, Draghi and colleagues should compare that algorithm with what they are feeding the human bankers with; the portfolio invariant risk weighted capital requirements that assumes that bankers do not see or clear for risks by means of size of exposure and risk premiums charged.

Then these regulators would understand that with their over-the-board incentives for banks to invest or lend to what is safe, like AAA rated securities and sovereigns, like Greece, they are in fact creating those conditions that dooms banks to suffer huge crises, sooner or later, over and over.

Then these regulators would understand that their regulations induce banks to stay away way too much from lending to what is perceived risky, like SMEs and entrepreneurs, something which clearly must weigh heavy against the prospects of our real economy to growth.

Me and my constituency!

Me and my constituency!

FT, just so that you know:

Some very few regulators thinking they were capable of managing the bank risks of the world, caused and are still causing immense sufferings, and you Sir are refusing to help holding them accountable for that.

My wicked question to FT

When do banks most need capital, when the risky turn out risky, or when the "not-risky" turn out risky? --- Yep, I think so too!

Videos: The Financial Crisis

My credentials

I have more credentials than most to speak out on the financial crisis and the subprime financial regulations having spoken out loudly about that since 1997...which could be embarrassing to “experts” with weak egos.

Most of those who think of themselves so broadminded when asking for “out of the box thinking” are so very narrow-minded they can only accept what comes, if that outside box lies “within their own small networks”.

Thank you, Martin Wolf

And on July 12 2012 Wolf also wrote that when "setting bank equity requirements, it is essential to recognise that so-called “risk-weighted” assets can and will be gamed by both banks and regulators. As Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk."

And that is something that I of course also appreciate, but that yet makes me curious on why Wolf does not follow up on it.

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Off-the-blog

One great perk I get from maintaining a blog like this is that it allows me to sustain many conversations with some great journalists who also need and wish to be kept “off-the-record” or as I call it “off-the-blog”.

Yet one wonders

Between January 2003 and September 2006, out of 138 letters to the editor that I sent to the Financial Times before I placed them on this blog they published these 15. Not bad! Thank you FT!

Unfortunately, since then and until the very last day of the decade, out of some 1.000 letters that you can find here, FT published none, zero, zilch. Of course FT is under no obligation whatsoever to publish any of my letters and of course one should not exclude the possibilities that my letters might have quite dramatically gone from bad to worse… yet one wonders.

My usual suspects are:

1. Someone in FT with a delicate ego feels his or her importance diminished by giving voice to a lowly non PhD from a developing country daring to opine on many issues of developed countries.

2. That FT has some sort of conflict of interest with the credit rating agencies that makes it hard for them to give too much relevance to someone who considers they have been given too much powers.

3. The FT establishment had perhaps decided there were only macro economic problems and not any financial regulation problems, and wanted to hear no monothematic contradictions on that.

4. That FT feels slightly embarrassed when someone repeatedly asks the emperor-is-naked type question of what is the purpose of the banks and realizing this was something FT should have itself asked a long time ago.

5. It is way too much oversight for FT to handle.

6. Or am I just supposed to be a living example of one half of the Financial Times motto, namely that of "without favour"Which one do you believe is closest to the truth?

A Blog is born

I like reading The Financial Times, or FT as it is known, and I frequently write letters to the editor and some of them that have indeed been kindly published, for which I feel thankful. But then I realized that all those letters to the editor that for reasons impossible for me to comprehend were never published, were condemned to an eternal silence not of their own fault, and so I decided to, at a marginal cost of zero, to resurrect them and keep them alive, right here.

English is not my mother language so bear with me and you’ll probably note when my letter has been published in FT by its correctness. Swedish is my mother language but I have not written anything serious in it for about 40 years and last time I tried, they just laughed their hearts out because of my démodés. Polish is my father language but, unfortunately, I do not speak a word of Polish, much less write it. Yes Spanish is my language, as I am from Venezuela and although I trust I write in it with great flair, I would still never dream of publishing an article in Spanish without having it edited by my wife.

And so friends here is my Tea with FT blog with my old and new letters to the editor. I hope you will share them with me now and again, and then again and again.

Welcome, and cheers, as I believe they say over there.

Per

PS. Just so that FT does not get too cocky and believe it is my only window to the world, I will now and again publish a letter sent to the editor of another publication.